One more risk to consider from US election

By Peter S. Kim

The U.S. election week is finally here. With the fate of the democratic world hanging in the balance, this is one of the most difficult elections to call and even harder to gauge the impact on the economy, stock market and geopolitical landscape. All three are already sinking into a state of chaos, and regardless of the election outcome, uncertainty is unlikely to end for investors.

Whoever wins this week, the new president faces a deglobalized world with the accompanying geopolitical risks. None exemplifies that trend more than the brinkmanship in the Middle East and Israel, which, like the Russia-Ukraine war, has no end game in sight. Another potential geopolitical hotspot in waiting is North Asia, where North Korea's Kim Jong-un just joined hands with Russia's Vladimir Putin and entered the war with Ukraine. The implications of this decision inevitably involve their neighbor China, whose displeasure has been expressed in open view. A Trump win could add fuel to the already bizarre and unexplained relationships Trump has with Putin and Kim.

When Trump ran against Hillary Clinton in 2016, the trade war with China and tariff threats were considered a one-off election ploy devised by Trump's desperate and unlikely campaign. Now, rising protectionism is no longer a concept but a trend that will outlast the next president. This time, the trade war is the rare bipartisan policy assured to win votes for both parties. There is a misconception that the stock market has been magically immune to a tariff war. One explanation is that despite the news headlines, we have not come close to seeing a real tariff war from a historical perspective; the current level of tariffs has a long way to go before approaching levels seen during the 1940s. So far, the scale and scope of tariff threats have been more bark than bite, but escalation of the tariffs remains a real threat to the global economy and equity markets. The pace and scale of the trade war could be determined by the actions of the incoming U.S. administration and the corresponding reactions of China and other nations.

If there were to be an unexpected and untimely problem for the incoming U.S. president, it would be an escalation of the geopolitical landscape involving the alliance between Russia, China and North Korea. North Korea entered the global focal point by sending an estimated 12,000 troops to join Russia in its war with Ukraine last week. North Korean soldiers are expected to fight Ukraine forces who raided Russia's Kursk region in August. The latest development follows the strategic partnership signed between Putin and Kim in June, which outlined an agreement to offer "mutual assistance" in case either country is attacked. The involvement of North Korea puts China in an uncomfortable position as Russia's other ally. For decades, North Korea's isolation has, by default, made China the de facto guardian that the West can rely on to control the hermit kingdom. But North Korea's recently acquired nuclear capability and its warming relations with Russia may now force the hand of China and its tenuous relations with the U.S. and allies. Amid this burgeoning relationship between North Korea and Russia, China suddenly seems like the mature member of the tripartite.

During Trump's presidency, Kim Jong-un surpassed his father, Kim Jong-il, by achieving bilateral talks with the U.S., even though the negotiations ultimately led nowhere. U.S.-North Korea bilateral talks offered advantages for both Kim and Trump. By participating in bilateral talks, North Korea fully achieved its first objective of stepping out of China's shadow, undermining China's historical role as the sole mediator of North Korean issues. Following the 1950-53 Korean War, China and the Soviet Union competed to win their neighbor North Korea's allegiance as the two aspiring superpowers sought a broader advantage. Since the collapse of the Soviet Union in 1991, North Korea has been left with only China as an ally. And North Korea's standing, both politically and economically, was severely damaged in the wake of the collapse, as evidenced by the decline of the country’s economy. As the sole sponsor, China seemed reluctant to encourage North Korea to open up its economy, as China itself had done. By staying economically and politically isolated, North Korea has been a convenient buffer between China and U.S. allies, South Korea and Japan. Now, with the latest alliance with Russia, North Korea is using its classic strategy of pitting two major powers against each other to maximize its bargaining power.

The next move is up to China: it can either distance itself from the emerging alliance between Russia and North Korea or strengthen this loose coalition, positioning itself as the pragmatic member of a three-way partnership. These three unpredictable nuclear powers jostling for bargaining power among themselves adds to the risks that the world is already facing.

The rise in authoritarianism is being empowered by a dividing world that used to be united under a globalized world led by the U.S. Trump's first term in power was the spark that led to the current deglobalization. With a possible second term, Trump, with no chance of a third term, could deliver irreparable damage to the world order, one which is already being overtaken by despots driven by ego and hubris.

Peter S. Kim ([email protected]) is managing director at KB Securities. The views expressed here are his own.